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This Toolkit is designed for those who are typically responsible for cost allocation planning and implementation for State and Tribal automated systems supporting Federal, State and Tribal public assistance program.

National office (Federal) financial staff who review and approve State Cost Allocation Plans

Increasingly, as new technologies and new approaches like enterprise architecture have become available, States and even Tribes are integrating their systems to administer several Federal, State and Tribal programs simultaneously.

Equitable cost sharing is very important because system integration and modernization costs are substantial, with software development usually the single largest cost item at over 50% of total system costs. Federal law requires equity in cost sharing.

Cost allocation is a procedure that State agencies use to identify, measure, and equitably distribute system costs among benefiting State and Federal public assistance programs.

Benefiting programmeans a State, Tribal or Federal public assistance program that uses capabilities in a State’s automated system to help its personnel perform a program function.

For example, the State of Arizona’s AZTECS system helps caseworkers determine an applicant’s eligibility for multiple programs’ services, including Temporary Assistance to Needy Families (TANF), Food Stamps, and Medicaid. In this example, TANF, Food Stamps, and Medicaid are all “benefiting programs” of the AZTECS system and share its costs.

Cost allocation methodologymeans the specific method, or approach, the agency uses to determine each benefiting program’s portion of the shared system costs. There is no “right” cost allocation methodology. For each system development, stakeholders in the State or Tribal agency and Federal benefiting programs work together to develop a mutually agreeable cost allocation methodology. Using this methodology, they determine the proportionate percentage and dollar amount of cost sharing for each benefiting program.

Cost allocation methodology for system planningis generally a simplified allocation based on “any reasonable method.” For example, when allocating shared costs for planning a State or Tribal system upgrade, the agency may simply allocate equal cost shares to major benefiting programs.

Cost allocation methodology for software developmentis generally a more complex allocation based on “Benefit Received” Benefit Received takes into account the benefiting programs’ overall and specific usage of system capabilities, and the level of effort involved to create or modify these system capabilities, adjusted for complexity.

NOTE: Benefit Received as used in cost allocation methodology should not be confused with benefits such as cash assistance or Food Stamps distributed to recipients eligible for public assistance.

Cost Allocation Plan (CAP)is the document that State agencies submit to Federal benefiting programs for approval during the Advance Planning Document (APD) process to obtain Federal funding for a portion of State system costs for system planning and software development. The Cost Allocation Plan documents the State agency’s cost allocation methodology and shows the proposed Program Share of Cost (%) and Share Amount ($) for each benefiting program. Each Federal benefiting program must approve the State agency’s Cost Allocation Plan.

In the APD and grant application process, State and Tribal agencies are required to submit a CAP for approval as part of their Planning APD (PAPD) or grant application when:

Total acquisition costs (Federal, State or Tribal funds) are anticipated to be $5M or more. (This amount is based on the total anticipated outlay, including costs both for planning and subsequent development.); and

The system will benefit two or more Federal programs.

These are the minimum requirements for a State or Tribal agency request for Federal Financial Participation. The Cost Allocation Plan will also need to take State or Tribal programs into account if the system will benefit one or more State or Tribal programs.

Systems development of less than $5 million total cost does not require submittal of a Cost Allocation Plan to Federal agencies. However, according to Federal cost accounting standards, some allocation method must be in place to equitably share costs that benefit two or more agencies. See OMB Circular A-87, “Cost Principles for State, Local, and Indian Tribal Governments.”

The amount of the estimated system planning budget determines the type of cost allocation methodology required for the Planning APD or grant application.

If the estimated system planning budget is less than $5M, the cost allocation methodology can be based on “any reasonable method.”

If the estimated system planning budget is $5M or more, the cost allocation methodology must be based on “Benefit Received.” This type of cost allocation methodology is the same one required for the Implementation APD.

Each benefiting Federal program approves its Share of Cost (%) and Share Amount ($) based on the proposed cost allocation methodology.

Federal Financial Participation begins when all Federal benefiting programs approve. When one or more Federal funding agencies does not approve the methodology, costs cannot be charged to that Agency. In order to claim costs, the State agency must revise its submittal to receive concurrence with its methodology from all participating Federal agencies.

As in the Planning process, State and Tribal agencies are required to submit a Cost Allocation Plan (CAP) for approval as part of their Implementation APD (IAPD) when:

Total acquisition costs (Federal, Tribal and State funds) are anticipated to be $5M or more; and

The system will benefit two or more Federal programs

These are the minimum requirements when a State or Tribal agency is requesting Federal Financial Participation. The Cost Allocation Plan will also need to take State and Tribal programs into account if the system will benefit one or more of these programs.

The Division of Cost Allocation(DCA) resides in the U.S. Department of Health and Human Services, Office of the Secretary.

Federal benefiting programs use the DCA’s service to review and approve Cost Allocation Plans for the following system-related costs:

Operations costs only

Maintenance costs only

All other costs, such as for planning, procurement, design, development, test and installation of an automated system must be submitted by States and Tribes in a CAP to the cognizant Federal benefiting programs for funding.

When direct costs (benefiting a single Federal, Tribal or State program) are more than 50% of system costs, apply the direct cost percentages to remaining system costs. For example, if the direct costs to Program A were 60% of system costs, the Program A’s share of remaining system costs would also be 60%.

When software development costs are less than 50% of system costs, apply a reasonable cost allocation methodology, for example, based on time and expense (T&E) reporting.

When software development costs are more than 50% of system costs, apply a cost allocation methodology based on “Benefit Received.”

Software development costs mean the costs for the engineering and management activities needed to analyze, design, and test software application programs. For purposes of cost allocation, software development costs include:

“Benefit Received” is the name of the cost allocation methodology preferred in the APD and grants process when software development costs are more than 50% of system costs. The goal of the Benefit Received cost allocation methodology is to distribute shared software development costs equitably among the benefiting programs.

The Benefit Received methodology is not based on client usage, i.e., recipient or caseload counts. Instead, Benefit Received is based on the State, Tribal and Federal public assistance programs’ usage of specific system functions and thus their equitable sharing of the software development costs required to produce those shared system functions.

It assigns a numeric value to the work required to develop specific system functions, for example, a system-generated report.

It factors in a level of effort to indicate the relative complexity of the software development work. The more complex the work, the higher the level of effort required.

Every program that uses this specific program function benefits, i.e., gets a “Benefit Received” from its use of that function.

Counting up these “benefits received” by each program and comparing them to the total “Benefit Received” by all programs provides an objective methodology for assessing programs their fair share of the software development costs.

When developing a system with all its required program functions, Information Technology personnel organize their solution within a technical structure. One typical technical structure is a ranking with different levels of detail about system functions and the technical work needed to develop those functions.

For example: The system will have a Reporting Function. Within the Reporting Function will be categories of report types (e.g., management, fiscal, accounting, statistical) This breaking down of the system into discrete components provides the allocation structure.

The estimated system implementation budget is $15,000,000. The three major benefiting Federal programs are Child Support Enforcement, Food Stamps, and Medicaid. One State-only public assistance program is also included in this cost allocation. Because software development costs are anticipated to be 70% of the system costs, the State’s cost allocation methodology is Benefit Received.